In its 16 September 2008 judgment, the European Court of Justice (ECJ) gave further guidance on how a dominant pharmaceutical supplier can justify limiting supplies to wholesalers:
- When parallel imports, internal EU cross-border sales are having an impact on the supply situation
- Where low fixed prices and compulsory supply obligations apply
EU competition rules prohibit a dominant company from limiting markets to the prejudice of consumers, including (unless justified) by refusing to supply product to others active in the market. Many pharmaceutical producers have a monopoly, and are clearly dominant on the market, because their patent protected product is the only, or clearly the best, medicine available to treat a particular disease.
The extent to which a pharmaceutical supplier can refuse to supply medicines that are being used for parallel imports has been the subject of disputes for many years. Controlled prices of medicines in one EU Member State have resulted in parallel trade of cheaper medicines to other Member States where the controlled price of the same medicine is significantly higher. Pharmaceutical companies have been struggling with how they can supply wholesalers involved in parallel trade of their medicines (thereby complying with EU laws on the free movement of goods and abuse of a dominant position) while still fulf illing their compulsory supply obligations at f ixed prices under the national health systems of many Member States.
GSK AEVE, the Greek subsidiary of GlaxoSmithKline plc, supplied Greek pharmaceutical wholesalers with numerous drugs, including Imigran, Serevent and Lamictal. The medicines supplied to the Greek wholesalers were destined for the Greek market as well as other EU Member States where the prices for these pharmaceuticals were considerably higher. As a direct result of significant parallel imports to other countries, GSK AEVE became aware of a shortage of these medicines in Greece. Consequently, it decided to stop providing its regular customers in Greece— the pharmaceutical wholesalers—and to directly supply hospitals and pharmacies. This was done from November 2000 to February 2001. Once the supply situation stabilised, GSK AEVE resumed supply to the wholesalers but limited the amount of pharmaceuticals it delivered to traditional national consumption plus 18 per cent.
The wholesalers commenced proceedings before the Greek Court of Appeal in Athens which resulted in questions on EU law being referred to the ECJ. The ECJ responded to those questions by way of a preliminary ruling in September 2008. The main issue addressed by the ECJ was whether a dominant undertaking abused its dominant market position by refusing to supply its customers in order to limit their parallel import activity. In other words, can parallel imports and their effects on pharmaceutical companies justify a refusal to supply, or in this case, a limitation of supply?
First, the ECJ rejected the argument from GSK AEVE that parallel trade brings few benefits to ultimate consumers (with the implication that action by dominant pharmaceutical suppliers to stop or limit parallel trade would not prejudice consumers). The ECJ found that parallel trade in pharmaceuticals was capable of offering the same products at lower prices to those supplied by the pharmaceutical companies, with the following consumer benefits:
- Parallel trade exerts pressure on prices, thereby creating financial benefits not only for the national health insurance funds, but equally for the patients concerned, for whom the proportion of the price of medicines for which they are responsible will be lower.
- It is likely that parallel trade will increase the choice available to entities in the Member State of import that obtains supplies by means of a public procurement procedure, in which the parallel importers can offer medicines at lower prices.
Second, the ECJ considered two competing interests:
- The prejudice to consumers if medicines are not available at the lowest possible price, including through competition from parallel trade
- The consumer prejudice that would arise if the medicines were not available at all
The ECJ considered whether the degree of regulation of the pharmaceutical markets in the European Union has an impact on the assessment of whether a refusal to supply those products constitutes an abuse of a dominant position. The ECJ concluded that the degree of price regulation in the pharmaceuticals sector cannot mean the EU rules on competition do not apply. The ECJ noted that consumer prejudice would arise if the dominant pharmaceutical supplier was to limit or refuse to supply parallel traders because parallel trade encouraged the availability of cheaper medicines.
However, the ECJ recognised equally that pricing regulation did lead to parallel trade. It also noted that an overriding consumer prejudice would arise if competition rules were interpreted so as to lead a pharmaceutical manufacturer to cease altogether the supply of medicines to the lower priced Member States in order to defend its own commercial interests.
Therefore, citing a much earlier decision (concerning supply of bananas) in United Brands v European Commission  C-27/76, the ECJ found that “a producer of pharmaceutical products must be in a position to protect its own commercial interests if it is confronted with orders that are out of the ordinary in terms of quantity”. So, even if a pharmaceutical company was in a dominant position, it could refuse to supply wholesalers involved in parallel trade, as long as that refusal to supply was to counter in a “reasonable and proportionate way the threat to its own commercial interests potentially posed by the activities of an undertaking which wishes to be supplied in the first Member State with significant quantities of product that are essentially destined for parallel export.”
To determine whether a refusal to supply is a reasonable and proportionate measure, the ECJ found that “it must be ascertained whether the orders of the wholesalers are out of the ordinary”. What is “out of the ordinary” in terms of quantity must be ascertained by the national courts in the light of these factors:
- The previous business relations between the pharmaceutical company holding a dominant position and the wholesalers concerned
- The size of the orders in relation to the requirements of the market in the Member State concerned
Pharmaceutical manufacturers who are dominant in a market now have a certain leeway and are no longer expected to honour unlimited demands from wholesalers involved in parallel trade. It is clear that a dominant supplier of a pharmaceutical product has good justification for refusing orders from wholesalers that would result in a national shortage. On the other hand, the wholesalers can require dominant pharmaceutical companies to continue to supply orders that are “not out of the ordinary”.
In addition to this ECJ decision, pharmaceutical manufacturers and distributors/ wholesalers must be aware of ongoing discussions within the European Commission on the repackaging of medicines and forthcoming proposals to better control counterfeit medicine. Following a report requested by EU Trade and Industry Commissioner Günther Verheugen on the implication of parallel trade in counterfeit medicine, the possibility of a reform of rules on repackaging of medicines in view of a stricter regime was put forward. However, at the time of going to press, no formal proposal had been published.